The City Hall building in Hercules, Ca., on Thursday May 10, 2012. State Controller John Chiang rips into the city of Hercules after completing two audits, saying "During my time in office, this could be the worst set of city accounting records I have seen. The City's books were so poorly managed, that I must question their use of every single federal and state dollar granted to the City. Along with missing dozens of records, the city, which is teetering on bankruptcy, was unable to explain what it did with $2 million in state and federal funds. City staff often ignored or cancelled meetings with the auditors, and by the end of the review, the city no longer had a senior accountant. less

The City Hall building in Hercules, Ca., on Thursday May 10, 2012. State Controller John Chiang rips into the city of Hercules after completing two audits, saying "During my time in office, this could be the ... more

Photo: Michael Macor, The Chronicle

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Mayor Dan Romero shows some of the proposed development areas in Hercules.

Mayor Dan Romero shows some of the proposed development areas in Hercules.

Photo: Sarah Rice, Special To The Chronicle

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Hercules misspent millions, audits find

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Sacramento --

City leaders in Hercules spent nearly $50 million of the city's redevelopment agency funds on questionable transactions, many of which had missing or nonexistent records, according to a pair of audits released Wednesday by state Controller John Chiang.

Chiang called the findings "absolutely incredible."

The audits largely point to a former city manager, who also was director of the redevelopment agency, as the source for the problems, and said that he directed millions of dollars to a firm he controlled and essentially issued loans that amounted to a giveaway of public funds.

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Chiang said a lack of information from the city makes it impossible to know if money was actually stolen. The audits cover a five-year period, from 2005 to 2010, and also found that the city had almost no internal oversight of management and spending from 2007 to 2010.

"We don't know, because we have a substantial number of documents that are missing," said Chiang, who noted "self-dealing, nepotism and other public trust abuses" uncovered by the audits.

"The story can't be completely told, and that's problematic," he said.

Unnamed city manager

The audits focus largely on the unnamed city manager who was appointed in 2007 to oversee the city's operations and its redevelopment agency and worked for the city until he resigned in January 2011.

The city manager of Hercules at that time was Nelson Oliva. Oliva could not be reached for comment.

According to the audits, the value of contracts the city held with a consulting firm controlled by the city manager significantly increased after he got the job in 2007, resulting in $3 million of city redevelopment dollars going to the firm.

Auditors with the controller's office found no evidence of a competitive bidding process for the contracts. The city is suing Oliva to get the money back, and city officials said the FBI is investigating financial dealings from his time as city manager.

"They've looked at boxes of records, computer records, hard drives. ... They're good at asking questions, but they don't answer too many," said the city's current city manager, Steve Duran, who started his job in October 2011.

Oliva has not been charged with any crime.

The FBI would neither confirm nor deny that there is an investigation.

The audit states that the city manager asserted that he had transferred ownership of the firm to his three daughters when he took that position, but he continued to represent the firm while soliciting business from other municipalities during that time.

In addition to the deal involving the family firm, the city manager submitted budgets with grossly overstated revenue, along with other financial business to the City Council, whose elected officials often approved them with no debate or discussion, the audit said.

In fact, the controller found that between January 2007 and December 2010, the council adopted 40 ordinances, 679 city resolutions and 360 redevelopment agency resolutions, and all but one were by a unanimous vote.

Those included land purchases of five parcels, totaling more than $44 million, the audit said. Auditors were not provided with any appraisals or other pertinent documents - such as who the land was purchased from - and could not evaluate whether the city paid a fair price or whether there was a conflict of interest in the purchase, the audit said.

Other problems

Other problems included a program to install locking mailboxes in parts of the city to avoid mail fraud. The city spent $247 in installation costs per mailbox, and more than $220,000 overall, money the auditors said was not allowed to be spent on such a program, according to the audit.

Another $1.4 million was spent from redevelopment funds on so-called "administrative costs" for which there is no documentation, auditors found.

The audit also found that the city entered into contracts with principals at the four public schools in Hercules, paying them a total of nearly $200,000 over four years for vaguely defined consulting services. Some principals submitted invoices for things that would be part of a regular job of a school leader, such as attending school ceremonies, the audit said.

On top of all that, city officials racked up large meal and hotel bills on city credit cards, totaling $254,000 between 2009 and 2010, according to the audit. The former city manager actually used a city credit card in September 2009 to book two hotels on the same night - one in Burbank and the other in San Jose - during what was a one-day trip to Burbank, auditors found.

The residents of Hercules already have expressed outrage over the situation, as some of the problems became public before the audits. They elected two new members to the City Council and recalled three others, said Duran.

'A mess of things'

He said city leaders are working to undo the damage caused by others before them.

"The previous administration made a mess of things in the financial and real estate world of Hercules," he said. Duran said that financial controls and proper accounting practices have been implemented and that new leadership took over in time to save Hercules from bankruptcy.

"We're stable, but we're still in intensive care," he said.

Duran said city leaders did not disagree with the findings in the audit, but he did say he disagreed with any notion that city workers were uncooperative with auditors. The number of staffers has been slashed by half, with longtime workers leaving, and those who remained didn't know where records were located and were overwhelmed by work.

Chiang said the city is making progress, but he said the problems should spark civic engagement.

"Hopefully, the local citizenry will get involved with their hometown government and actively follow what's transpiring," he said.